Attorney-at-Law

Archive for July, 2018|Monthly archive page

BEING AND NOTHINGNESS – PART DEUX

In Uncategorized on 07/20/2018 at 23:15

There is really an existentialist quality to the Section 6751(b) Boss Hoss penalty sign-off. As Marty Heidegger might have said, “What does it mean to be?” Is the mere existence of the sign-off its whole function? Scott T. Blackburn would seem to stand for that proposition. See my blogpost “Robosigner? – Part Deux,” 4/5/18.

But ex-Ch J L. Paige (“Iron Fist”) Marvel seems to think that, in the Boss Hoss corral at least, being is nothingness until there’s a trial if necessary to find out something or other regarding the section 6751(b)(1) penalty approval requirement and whether it is met in a particular case. See my blogpost “Play Nice At the Graev,” 7/10/18.

Into the fray leaps Judge Gale with a designated hitter and another long-since-tried-and-awaiting-opinion case, George Fakiris, Docket No. 18292-12, filed 7/20/18.

George never raised Boss Hossery, because his case was tried pre-Graev. And since on the trial George didn’t ask, IRS didn’t tell, thinking George had waived. But IRS wants a reopener to make sure that the Boss Hoss sign-off requirement is satisfied. And in furtherance of its motion, IRS hands in three (count ‘em, three) documents, one for accuracy, one for negligence, and one for gross valuation misstatement.

Judge Gale will buy the reopener. It’s discretionary, non-cumulative, nonimpeaching, material, and certainly is a game-changer.

But he won’t buy the wild-carded documents. If any are business records, they need a foundation. And as one is an Office of Chief Counsel billet doux with no showing that the author-attorney got a sign-off from her Boss Hoss, its existence isn’t enough.

So let’s have an informal discovery play-nice, followed by a trial. Or better yet, a settlement.

Is the Boss Hoss’ being nothingness?

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IT’S THE PARTNER, NOT THE PARTNERSHIP

In Uncategorized on 07/20/2018 at 17:44

Judge James S (“Big Jim”) Halpern has another TEFRA silt-stirrer, and it’s all about basis. The silt stirred up by TEFRA through its computational-vs.-deficiency dogpaddle results today in Judge Big Jim finding Tax Court has jurisdiction, that notwithstanding the stipulated decision entered years ago the issue of the nonpartner’s basis in the contributed property (euros; this is another Son-of-Boss mix-and-match dodge) was never determined, so there’s a free kick awarded to Larry S. Freedman & Sheri L. Freedman, docket No. 23420-14, filed 7/20/18.

The partnership Larry got into was a phony, but it got an FPAA and Larry got hammered. The only issue now is the 40% overvaluation penalty. Larry claims good faith, and that the net amount of the liquidating distribution of the euros needs to be determined.

Judge Big Jim agrees. Computational adjustments (no SNOD, straight to assessment) are those related to what the FPAA determined, and don’t need partner facts. IRS “…can collect the penalty he determined in the notice of deficiency as a computational adjustment apart from the present case only if he establishes that the penalty ‘relates to’ our redetermination of the capital contributions made to [phony partnership] and is ‘based on’ our determination that the reported contributions were overstated by at least 400%. Respondent has not made the showing required for us to grant his motion to dismiss the portion of the case involving petitioners’ request for a redetermination of the penalty respondent determined.” Order, at p. 5.

Although Tax Court could have determined Larry’s basis in the euros, Tax Court didn’t. And as it was an agreed decision, neither Larry nor IRS asked them to. So if Larry had any basis, that might offset the overvaluation chop IRS wants to slug him with.

Now if you want to see why TEFRA was the mother of abominations, try this.

“It may be that, in asking us to redetermine to be zero the capital contributions made to Pinnacle in the decision entered in [phony partnership]’s partnership case, the Commissioner was referring not to the capital account credits allowed for the contributions (and reported on Schedule M-2 of its Forms 1065), but instead to the partnership’s ‘inside’ basis in the contributed property. Even under that interpretation of our Order & Decision in Pinnacle’s partnership case, however, it would not follow that the penalty respondent determined in the notice of deficiency was based on our Order & Decision. Because a partnership’s inside basis in contributed property and the outside basis of a partnership interest issued in exchange for the property are both determined by reference to the partner’s precontribution basis in the property, secs. 722, 723, a determination that the partnership overstated its inside basis in the property would indicate that the partner’s initial outside basis was also overstated. If Mr. Freedman overstated his initial outside basis in his interest in [phony partnership], it would tend to follow that he also overstated the basis of the euros he received from the partnership in liquidation of that interest. But Mr. Freedman’s correct basis in the euros (in contrast to the redetermined capital contributions and partnership inside basis) was almost certainly higher than zero. Therefore, a determination that [phony partnership]’s basis in the property Mr. Freedman contributed was zero (or, more precisely, did not exist) would not establish that Mr. Freedman’s claimed basis in the distributed euros was overstated by at least 400%.” Order, at p. 7.

 

 

STAMMTISCH

In Uncategorized on 07/19/2018 at 16:34

I remember admiring, years ago, on a table in a cozy corner of an old-fashioned wirtschaft, reserved for the long-time regulars, with their fragrant pipes and large steins of local brew, the shining brass base with the black-letter brazen placard.

Well, I once threatened, on this very blog, that if ever I retire I might just open up a pub and call it The Jolly Rounder; see my blogpost thus entitled, 3/16/15.

And if I do open the pub, it will have a stammtisch. And the regulars will feature such as Christopher R. Chapman & Pamela J. Chapman, Docket No. 3007-18, filed 7/19/18. Now I’m not starting a pub or issuing invitations, but The Jolly Rounder is an appealing idea.

Chris & Pam are definitely candidates for the title. They’re long-time nonfilers, they’ve twice in the past petitioned SFRs, claiming these weren’t returns, and lost at every turn. Nothing daunted, they’re trying again.

IRS claims there’s neither SNOD nor NOD, so no jurisdiction, and move to toss Chris & Pam. But so that they don’t leave with nothing, IRS moves to hand Chris & Pam a $3K Section 6673 chop.

Chris & Pam have drawn STJ Daniel A (“Yuda”) Guy, who chooses to designate this tale, for which I thank him. STJ Yuda is a pleasant person among friends and family, I am told, but is rather testy with those who waste time and resources with protester blather.

“Although respondent correctly points out that the Court’s jurisdiction typically depends on a determination by the Commissioner and a timely filed petition, see secs. 6213(a) and 6330(d), we need not focus on those requirements in this case. Rather, we look to the doctrine of res judicata which bars repetitious suits on the same cause of action. See Koprowski v. Commissioner, 138 T.C. 54, 59-60 (2012). This doctrine serves a dual purpose of protecting litigants from the burden of relitigating the same cause of action and promoting judicial economy by preventing unnecessary or redundant litigation. Meier v. Commissioner, 91 T.C. 273, 282 (1988). In short, once a court of competent jurisdiction has ruled on the merits of a cause of action, the parties may thereafter be barred from relitigating every matter which was offered in the prior suit, as well as any matter which might have been offered in the prior suit. Koprowski v. Commissioner, 138 T.C. at 60; see Commissioner v. Sunnen, 333 U.S. 591, 598 (1948).” Order, at p. 4.

In short, Chris & Pam, you had your chance and you blew it.

And STJ Yuda is clearly annoyed.

“Petitioners argue that the Court should not impose a penalty because they have raised a novel question as to whether they are properly characterized as ‘taxpayers’ subject to Federal income tax where they have not filed Federal income tax returns and their tax liabilities arise from substitutes for return made by the Secretary under section 6020(b).

“The Court informed petitioners in their collection cases at docket Nos. 30014-15L and 30031-15L that section 6330(c)(2)(B) barred them from challenging the existence or amount of their tax liabilities for the years in issue. Petitioners were reminded of that fact again in connection with the agreed dismissals of the petitions that they had filed at docket Nos. 22516-17 and 22520-17. Against this backdrop, it is clear to the Court that petitioners’ latest attempt to challenge their tax liabilities represents a delay tactic and that their argument amounts to nothing more than time-worn tax protestor rhetoric that is both frivolous and groundless. Addressing this matter has resulted in a needless waste of the Court’s resources. Accordingly, the Court will grant respondent’s motion and impose a penalty of $3,000 on petitioners pursuant to section 6673(a).” Order, at p. 5.

 

SHORTCHANGING US

In Uncategorized on 07/19/2018 at 01:13

Judge Buch gets it mostly right in this off-the-bencher, Gretchen Sue Humiston, 27125-16S, filed 8/18/18. But he gets the last part wrong.

When Gretchen Sue split from unnamed ex-husband, their divorce lawyers got it entirely right, both with the Matrimonial Settlement Agreement and the subsequent modification thereof. Parties no longer living together, decree of divorce, MSA explicitly states cash payments made for a fixed term of years not contingent on any child, MSA explicitly states deductible by husband and income to wife, and payment terminates with death of either. So it’s truly alimony.

Except. Ex-husband didn’t pay, so modification agreement. But payments as modified thereunder still terminate with death. So still alimony.

Except. Ex-husband had to pay on life insurance policy on Gretchen Sue, with their kids as beneficiaries. Gretchen Sue says that substitutes for ex-husband’s payments if she dies, thus payment doesn’t terminate with her death. So Gretchen Sue doesn’t pick up the payments she got from ex. She claims it’s a property settlement, not alimony.

IRS does pick it up, and hits Gretchen Sue with a SNOD.

Judge Buch: “Ms. Humiston’s arguments as to why the payments should be treated as property settlement are unavailing. She argues that the payments should not be considered as terminating after her death because the life insurance policy maintained on her is a substitute for those continuing payments. But that life insurance policy does not require any payments by Mr. Humíston after Ms. Humiston’s death.” Order, transcript, at p. 8.

Gretchen Sue is peeved that ex-husband has shortchanged her, so she shouldn’t have to pay tax on what she got.

“She notes her perceived irony at the fact that the shortfall in Mr. Humiston’s regular maintenance payments is roughly equal to tax liability differential that arises from including (for her) and deducting (for him) the regular maintenance payments.” Order, transcript, at p. 8.

OK, so Judge Buch got it right. The deal, as amended both in writing and by performance, is alimony; Section 71(b)(1) is satisfied.

But here’s where he gets it wrong.

“But Ms. Humiston does not get to make herself whole by shortchanging the Commissioner.” Order, transcript at p. 8.

No, sir, not the Commissioner…shortchanging you and me and every taxpayer who pays what they properly owe. The Commissioner is just an agent, collecting revenue to run the government. If someone pays less, we pay more.

NO FISHING

In Uncategorized on 07/18/2018 at 17:05

400 Second Street, NW, is posted: off limits, no fishing. Judge Albert G (“Scholar Al”) Lauber has nailed up the sign in Trust u/w/o BH and MW Namm f/b/o Andrew I. Namm, Andrew I. Namm and James Doran, Trustees,  Transferee, et al., Docket No. 8485-17, filed 7/18/18. There are nine (count ‘em, nine) docket numbers involved, and a trip down Memory Lane, as this is a Section 6901 romp through an exploded Son-of-Boss, another Diversified Group, Inc.- James (“Little Jim”) Haber production.

Y’all remember Little Jim, the famous immunologist? No? He’s shown up about a dozen times in this my blog over the last six years. I won’t chronicle them all, for want of time and space, but google.com might find some of them.

Howbeit, Little Jim is out of the picture, but the Namms want to escape penalties by claiming reliance on the white-slippered corps de ballet that Little Jim assembled to window-dress his mix-and-match.

IRS claims that they handed over everything they had that bears upon the Namms’ cases.

The Namms, nowise satiated with IRS’ averments, want “…a vast universe of information that may be contained in IRS files as a result of possible prior or ongoing IRS examinations or investigations of the third parties….” Order, at p. 2.

Had IRS ever examined any of the ballerinas in connection with their dealings with Little Jim & Co.? If IRS has, hand over the entire file. That founders on Section 6103; information produced on audit vel non (that’s “if any,” as classical scholars like Judge Lauber say) is protected, except for the transactional relationship in Section 6103(h)(4)(c). But the Namms “…have failed to show that such information ‘directly relates to a transactional relationship’ between the third parties and them.” Order, at p. 4.

The Namms try an “it might be, it could be” that the sought-after material might show IRS couldn’t discern what was going on, and therefore the Namms didn’t have constructive knowledge of Little Jim’s skullduggery. Too big a stretch, says Judge Scholar Al. “We find this chain of hypotheses and inferences too thin a reed on which to hang a discovery request of this magnitude. Indeed, the ultimate target of petitioners’ request would seem to be the opinions and observations of the IRS officers who may have participated in whatever investigations occurred. Wholly apart from section 6103, those opinions and observations would appear to be immune from discovery under the deliberative process privilege.” Order, at p. 4. Greenberg’s Express, anyone? Whatever IRS thought, the issue is what they did.

“Finally, even if the information petitioners seek would otherwise be discoverable, we would deny their motion to compel because the scope of their request is disproportionate to the potential utility of the information. We have discretion to limit the scope of discovery if we determine that: (1) ‘[t]he discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive’; or (2) ‘the discovery is unduly burdensome or expensive, taking into account the needs of the case, the amount in controversy, limitations on the parties’ resources, and the importance of the issues at stake in the litigation.’ Tax Court Rule 70(c)(1)(A) and (C).

“Petitioners have requested 18 years of IRS examination material possibly involving as many as six separate taxpayers, including two tax-shelter promoters and one of the largest accounting firms in the world. Most if not all of this information will have no bearing on the transactions that are actually at issue in these cases. Through informal discovery, respondent has already provided petitioners with all documents it has obtained from the third parties relating to the transactions at issue in these cases.” Order, at p. 5.

Nothing stops the Namms from asking the six third parties for info. They apparently haven’t.

Judge Scholar Al puts it simply: “Petitioners’ discovery request strikes us as a classic ‘fishing expedition.’” Order, at p. 3.

I wish Judge Lauber had designated this order. It’s really too good to relegate it to the mine run of orders.

And I wish the order had been better paginated. The pagination on the website is unworkable, so I used my own.

IF THE CLIENTS ARE SPLIT, YOU’D BETTER SPLIT

In Uncategorized on 07/17/2018 at 16:11

Ex-Ch J Michael B. (“Iron Mike”) Thornton is not so direct with petitioners’ counsel in John R. Fletcher & Jo Ann Fletcher, Docket No. 13040-15, filed 7/17/18, but he’s sending a message all counsel should heed.

John’s and Jo’s counsel, whom I’ll call JD, apparently has health problems. His secretary failed to calendar a due date for a show-and-tell memo: what’s your facts and law, any expert witnesses, and status of prep. Then ex-Ch J Iron Mike has a phoneathon, wherein JD says his health may prevent trial when scheduled (the case had been continued five, count ‘em, five, times) and his health prevents him from preparing.

“Finally, [JD] stated that petitioners, who were divorced at the time of filing the petition, are ‘split’ on whether he may continue to represent them. He explained that he has advised petitioners regarding potential conflicts in representing them in this case but does not have their consent in writing. Mr. Davidson also provided a noncommital response as to whether either petitioner plans to seek spousal relief pursuant to section 6015.” Order, at p. 2 (Footnote omitted).

Ex-Ch J Iron Mike cites Rule 24 and the ABA Model Rules extensively, with a reminder to JD that the Court can toss counsel for unresolved conflicts.

And Rule 1.16(a)(2) requires withdrawal if an attorney is unable to represent clients because of physical or mental health issues.

But ultimately there is a further incentive to bail, and ex-Ch J Iron Mike is nowise loath to tell you all about it.

“…attention is called to section 6673(a)(2) which provides that whenever it appears to the Court that any attorney admitted to practice before the Tax Court has multiplied the proceedings in any case unreasonably and vexatiously, the Tax Court may require that such attorney pay personally the excess in costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.” Order, at p. 4.

So, JD, show cause in writing why you should not be tossed. And your clients are getting a free copy of this order.

BOILERPLATE IS A HAZARDOUS SUBSTANCE – PART DEUX

In Uncategorized on 07/16/2018 at 20:39

Or, Never Time to Do It Right

Word-processing software is the boon and bane of our existence. I was talking to a colleague over coffee yesterday, and we were discussing the demise of the legal secretary, now that we all have computers and files of documents from which to cut, paste, extrapolate, interpolate and obfuscate on every topic that may possibly swim into our working-day ken.

So speed beats care, and there’s never time enough to do it right, but always time to do it over. Except even then we are the prisoners of our electrons.

Today Judge Cohen shows no patience with an IRS attorney who grinds out the pretrial memo and opening brief, and then changes his story on reply brief, in Darrell Archer, 2018 T. C. Memo. 111, filed 7/16/18.

I can sympathize with the IRS attorney. What Darrell lacks in substantiation he doesn’t make up for in testimony, so most of his deductions go the way of all clichés.

Darrell, like so many of the unsubstantiated, owns and operates rental real estate. I expect the IRS attorney thought this was a throwaway, and went for the first boilerplate paragraphs he could find.

It proved an impediment.

“Respondent argues in his pretrial memorandum and in his opening brief that petitioner is not entitled to deduct the rental losses … to the extent they exceed $25,000 because of the passive activity limitations of section 469. See sec. 469(i). Nothing in the record, however, suggests that the loss deductions claimed exceeded $25,000, or that any overall limitation was the reason for disallowance. We see no reason, therefore, to discuss further the complex provisions of section 469. We interpret respondent’s arguments as a concession as to any substantiated expenses totaling less than $25,000.” 2018 T. C. Memo.111, at pp. 12-13.

Might have done better to forego the passive losses and stayed with the non-substantiation. But the attempted goal-line save is even worse.

“In his reply brief respondent argues that petitioner failed to substantiate his rental losses and seeks to impose additional obligations on petitioner not addressed in respondent’s pretrial memorandum, at trial, or on opening brief. We disregard those belated contentions.” 2018 T. C. Memo. 111, at p. 13.

So Judge Cohen hands Darrell $5K in real estate losses, based on Cohan and Darrell’s testimony that otherwise flunks the other tests.

“His testimony and his brief emphasize his subjective belief that ‘every deduction that I made I believed to be an absolute legitimate deduction. A deduction that I deserved and should take’. Such testimony does not carry his burden.” 2018 T. C. Memo. 111, at p. 9.

Boilerplate is indeed a hazardous substance.

 

GREENBERG’S EXPRESS – NOT THE LAST STOP

In Uncategorized on 07/13/2018 at 16:48

Maybe that hallowed 1974 classic, Greenberg’s Express, 62 T. C. 324, isn’t so dead as maybe some of us thought. When I wrote my blogpost “Play Nice at the Graev“ 7/10/18, I envisioned interrogatories, depositions, document demands, and trials, flowing from ex-Ch J L Paige (“Iron Fist”) Marvel’s expansive order therein recited.

No less an authority than the Lead of The Jersey Boys confided to me the other day that Greenberg’s Express has been derailed, that Judge Tannenwald’s famous diktat that “(A)s a general rule, this Court will not look behind a deficiency notice to examine the evidence used or the propriety of respondent’s motives or of the administrative policy or procedure involved in making his determinations,” 62 T.C. 324, at p. 327, is dead-letter law.

Formerly, only when the very fabric of the Constitution was involved would Tax Court lift the shroud that envelops the IRS’ internal machinery.

But Graev III, while broaching no new law (the statute is twenty years old this year), opened the floodgates in many cases where the Section 6751(b) Boss Hoss sign-off wasn’t even honored in the breach, much less the observance.

Who better to put Greenberg’s Express back on the tracks and cause that venerable locomotive to make the merest whistlestop at the Graev than The Great Concurrer/Dissenter, Master Silt Stirrer and Old China Hand, Judge Mark V. Holmes?

Here’s a designated hitter to send us off to the weekend despite the Friday the 13th jinx, Scott A. Householder & Debra A. Householder, et al., Docket No. 19150-10, filed 7/13/18.

Scott & Deb had their day in court, and even cross-examined IRS’ declarant who now seeks to wild-card in the Boss Hoss sign-off, but nobody mentioned Boss Hoss on the trial. Scott & Deb yell “too late and prejudice, besides it’s all hearsay.”

Now the Boss Hoss sign-off is riddled with hearsay. But IRS is crafty, and relies on our old friend res gestae. I remember Prof. Grey T., on the Hill Far Above, so long ago, proclaiming “It’s all part of the reece jest-eye.”

For those of my readers who didn’t attend a high-priced law school, the res gestae is an exclamation or document introduced into evidence for the fact that it exists or was said, not for the truth thereof. So, like John Ciardi’s apostrophe to a poem, the statement need not mean but be.

True, the IRS is extremely tardy and slow off the mark.

“But we do think the Commissioner might have had less reason to anticipate the importance of § 6751 in this case than in many other cases. Although Graev III didn’t create new law, it is true that it and Chai are the first cases to clarify that § 6751(b) and § 7491(c) combine to place the burden of production on the Commissioner to show that he complied with § 6751(b) in cases where he wants a penalty. And unlike other cases where Chai ghouls have appeared, § 6751 never came up here in pretrial motions or discovery, and the Ninth Circuit has found that reopening the record may be justified in such a case. There wasn’t a change in law here — in the strictest sense of the phrase -but we also think it is possible that Graev III‘s consequences might have surprised the Commissioner in this case where § 6751 had not been talked about at all.” Order, at p. 6. (Citations omitted).

And Scott & Deb’s beef about prejudice and the need to sweat IRS’ declarant doesn’t get it, because said declarant testified enough on the trial back in 2014 to show the Boss Hoss did sign off.

As has been said before, the mere fact that the document exists is enough. See my blogpost “Robosigner? – Part Deux,” 4/5/18. All my piety and wit, and all my tears cannot wash out a word of it, as a much finer writer than I put it.

Edited to add: I’m told the line about a poem should not mean but be is not by John Ciardi, but by Archibald MacLeish. Sorry, Archie.

BAKED

In Uncategorized on 07/12/2018 at 18:19

Martin W. Washburn, Jr., 2018 T. C. Memo. 110, filed 7/12/18, owned a C Corp which was majority member of an LLC. Martin was “corporate secretary” of the LLC, although STJ Diana L. (“Sidewalks of New York”) Leyden doesn’t know how the LLC was taxed (2018 T. C. Memo. 110, at p. 3, footnote 3).

Howbeit, Martin “…and four other individuals (hereinafter sometimes collectively referred to as codefendants) participated in a scheme to defraud the Overseas Private Investment Corporation (OPIC) to obtain a loan of about $9.4 million for [LLC].” 2018 T. C. Memo. 110, at p. 3. OPIC was a US government agency whose aim was to encourage foreign investment by US small business companies.

Martin made the application as sec’y of the LLC, claiming his C Corp was the “sponsor” that is, the US investor, and was putting up a big chunk of cash, with OPIC throwing in the rest of our money (that is, our tax dollars at work).

Martin and the co’s worked a put-and-take with the cash that the C Corp supposedly ponied up. Their offshore enterprise first built a grain-drying facility in Vahenurme, Estonia, bought a bakery in Valga, Estonia (thus the title of this little tale), and later built a mill in Viljandi, Estonia.

Well, the Estonia deal turned out to be half-baked (sorry, guys).

“…disputes arose over the management and control of the milling and bakery operation.  It was during the course of these disputes that OPIC discovered that GSP had misrepresented certain facts in its loan application.  Contrary to the statements in the loan application, the investment contributions to [LLC] by [C Corp] and one other [LLC] owner [member?] were in substance a disguised loan from one of the codefendants.  Petitioner and his codefendants withheld bank statements from OPIC that showed that the investment contributions by [C Corp] and one other [LLC] owner [member?] were immediately distributed to the codefendant who made the loan.” 2018 T. C. Memo. 110, at p. 4.

In other words, the LLC members cashed out and left us (the US taxpayers) holding the cliché. They also engaged in buying equipment from themselves at inflated prices, and lied to OPIC.

Martin and the cos went down in some unstated-USDC, with $400K in restitution being ordered, as well as jail time.

The fight is about whether Martin gets a tax deduction for the $400K. Martin never got a SNOD, because he first claimed the $400K as withholding, and the CP23 IRS issued Martin taking that away doesn’t rate a SNOD; see Section 6213(b)(1).

Martin changed course, abandoning his claims that the $400K was estimated tax payments or a claim-of-right credit per Section 1341. Now he claims Section 162 business expense or Section 165(c)(2) transaction entered into for profit.

STJ Di looks at the stip the parties entered into. Remember, Tax Court judges love stips; who wants to sit through a lot of blathering witnesses and bombastic lawyers, when the facts are cut and dried?

The sacred Branerton case is exhumed, and veneration paid to it and its kindred.

“The stipulation process is considered ‘the bedrock of Tax Court practice’ and acts ‘as an aid to the more expeditious trial of cases’.  Branerton Corp. v. Commissioner, 61 T.C. 691, 692 (1974).  Stipulations narrow controversies to their essential issues in dispute. Generally, a stipulation is binding on the parties, and the Court is bound to enforce it.  Rule 91(e) provides an exception by permitting relief from the binding effect of a stipulation where justice so requires.  The Court generally enforces stipulations unless ‘manifest injustice’ would result. Absent manifest injustice, the Court ‘will not permit a party to a stipulation to qualify, change, or contradict a stipulation in whole or in part’.  Rule 91(e).” 2018 T. C. Memo. 110, at pp. 13-14. (Citations omitted, but they’re the usual “canned brief” types).

Remember, the Section 162 and the Section 165(c)(2) deductions are above-the-line, that is Schedule C type reductions in gross profit that reduce AGI before the Schedule A below-the-line deductions figure in. They’re not subject to the phase-outs for Schedule A deductions, like miscellaneous.

But Martin stiped to miscellaneous characterization.

“However, petitioner’s arguments on brief that he is entitled to an above-the-line-deduction for the restitution payments under section 162(a) or section 165(c)(1) are contrary to the parties’ stipulations.” 2018 T. C. Memo. 110, at p. 15. And Martin doesn’t yell “foul!” so he’s stuck.

So Martin is relegated to unreimbursed employee expense deduction, the now-extinct reef upon which so many petitioners have foundered. So does Martin. While the C Corp treated him as an employee (W-2 type), and the LLC always called him “corporate secretary,” the record is too scanty to establish him as an employee of the LLC. And the LLC is where the trouble arose, hence the restitution. And the restitution was partial repayment of the fraudulent loan, and repayment of loan proceeds (receipt of which wasn’t taxed) isn’t a deduction.

As for promoting Martin’s business, he hasn’t shown how paying back what he and the cos stole via the LLC helped his C Corp’s business.

Finally, although IRS and Martin’s counsel argued about whether restitution is punitive or compensatory, STJ Di doesn’t go there.

“Before a taxpayer is entitled to deduct a loss under section 165(c)(2), he must demonstrate that he has entered into a transaction the primary purpose of which was to make a profit. The business that an officer conducts for a corporation is not his own business.” 110 T. C. Memo. at p. 23.

If anyone made a profit, it was the LLC. The LLC was faking and baking in Estonia. So Martin is out. No deduction.

Takeaway- Must I say it again? Stipulations are the IEDs of litigation; they look so innocent, until they go off, taking your case with them.

 

LET ‘EM IN, LET ‘EM OUT

In Uncategorized on 07/12/2018 at 03:43

This blogpost comes to you late, courtesy of The Jersey Boys’ extravagant good nature. They hosted a remarkable four-hour CPE, whereat were gathered experts from IRS, NYSDTF and NYCDOF, explaining the concurrences and deviations in their taxpayer advocacy and enforcement schemas. The program was intended for tax pros whose clients have limited English (language) proficiency.

Mine had unlimited proficiency, but a selective understanding, of the English language, when I or anyone else told them what they didn’t want to hear. I’ve said it before: every taxpayer needs two tax advisers. One to tell them what the law is, and the other to tell them what they wish the law was. They could then elect whose advice to take.

Well, today the silt stir went on apace.

First, Judge Ruwe in Paul O. Martin and Cynthia M. Montes Martin, 2018 T. C. Memo. 109, filed 7/11/18, doesn’t let IRS reopen the record to put in the Boss Hoss sign-offs. After showing conclusively that whatever petitioners introduced as evidence was woefully deficient, and that they were only entitled to a couple bucks (hi, Judge Holmes) over the pittance IRS allowed them in the SNOD, Judge Ruwe slammed the door on IRS’ reopener motion. And he doesn’t tell us why.

“Compliance with section 6751(b)(1) is part of the Commissioner’s burden of production for those penalties to which the section applies. See Graev v. Commissioner, 149 T.C. , (slip op. at 13-14) (Dec. 20, 2017), supplementing and overruling in part 147 T.C. 460 (2016). Section 6751(b)(1) provides, subject to certain exceptions, that ‘no penalty shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.’

“Respondent concedes that he must demonstrate compliance with section 6751(b)(1) to meet his burden of production. The record does not contain any evidence that respondent complied with section 6751(b)(1). Accordingly, respondent did not meet the burden of production, and petitioners are not liable for the accuracy-related penalty for 2012, 2013, or 2014.” 2018 T. C. Memo. 109, at p. 20. (Citation omitted).

To the contrary, The Great Concurrer and Master Silt Stirrer, Judge Mark V. Holmes, lets in some Boss Hosses and keeps out others in Plentywood Drug Inc., et al., Docket No. 17753-16, filed 7/11/18.

As Plentywood is a Corp (whether C or S not stated, but doesn’t matter), Dynamo teaches us that Section 6751(b) doesn’t apply to corporations. See my blogpost “Howdy, Partner – Part Deux,” 5/7/18.

But the als are human people.

So IRS needs the Boss Hoss sign-offs to chop them. Except there was a question whether the als disputed their chops.

IRS claims the als’ attorney said they weren’t going to fight their chops.

“We reviewed the record in these cases and found that the individual petitioners did in fact dispute the penalties in their petitions, which is important because the Commissioner has the burden of production for showing that he complied with § 6751 in determining penalties against individual petitioners.” Order, at p. 1. (Citation and footnote omitted, but it’s Graev II and Dynamo.)

So, als, asks Judge Holmes, is you is or is you ain’t?

“Petitioners recently filed their response: They say that they already conceded penalties on some issues but that they did not want to concede penalties on others. What petitioners fail to do, however, is object to the Commissioner’s motion or give us a single reason why we shouldn’t grant it.” Order, at p. 2.

So like King Solomon, Judge Holmes cuts the Boss Hosses in twain. No reopener for Plentywood, the Corp, as Boss Hoss not needed for corporate chops; but reopener granted for the als, as the sign-offs are needed and the als haven’t objected.

I was pleased to be able to thank Frank Agostino, Esq., personally for Graev, the blogger’s delight. It’s a gift that just keeps on giving.